USD, Rates and Russell 2000

Client Talking Points

USD

It didn’t take much of a Dollar Up move (+1.2% on the week) to get everything inversely correlated to it to fall last week. Commodities and Oil were down -2.4% and -4.1%, respectively, last week (USD is back to flat on a year-over-year basis so whoever is looking for a “big USD tailwind to earnings” should remember that).

RATES

Treasury Yields stopped going down last week as Fed Heads jawboned about a rate hike (Dollar Up); immediate-term risk range on the UST 10YR is 1.84-1.98%; that’s a tight range – let’s see if they’re serious this time or just S&P 500 dependent (tightening into this Profit #Recession would be deflationary, again).

RUSSELL 2000

The Russell 2000 lagged (again) last week, dropping -2.0% on the week (vs. -0.7% for the S&P 500); at -16.7% from its all-time high in July. The RUT is back to within 330 basis points of being in crash mode (> 20% decline from the July peak); Russell 2000 peaked when U.S. corporate profits peaked (Q2 of 2015).

 

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Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 21% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
CME

CME Group (CME) put up a decent fourth quarter earnings print with a slight revenue and earnings beat. Not that we put much weight on what happened last quarter but trends into the new operating period are looking even better. The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts.

 

Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.

GIS

We continue to like General Mills (GIS) as one of the best large cap names in the packaged food space. With that being said, the third quarter was not without its noise surrounding the numbers; Green Giant divestiture, Walmart clean store policies, foreign currency exchange, and grain merchandising just to name a few, muddied the waters. But digging through the noise, this is a business that is truly turning a corner. When they set sail on fiscal year 2016 back in June of 2015, we knew this was not going to be an easy ship to turn towards success. Now, with many key product platforms turning (through strong product innovation and renovation) in the right direction and operational improvements implemented through cost savings initiatives, GIS is on the cusp of success. We will be measuring this success by realization of sustained top line growth in the low single digit range.

TLT

In our model the second quarter is the toughest compare on both GDP and U.S. corporate profits so we want to be very careful going into that and be positioned defensively. Stay long Long-Term Treasuries (TLT).

 

While small/mid cap U.S. Equities reverted to their bear market mean last week (Russell 2000 down -2.0% on the week and -16.7% since US Corporate Profits peaked in Q2 of 2015), so did a few other US Equity Market Style Factors that had had a big 1-month bounce:

  1. High Beta stocks were -2.0% on the week
  2. High Leverage (Debt/EBITDA) stocks were -1.9% on the week
  3. High Short Interest stocks were -1.7% on the week

Three for the Road

TWEET OF THE DAY

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QUOTE OF THE DAY

No profit grows where no pleasure is taken.

William Shakespeare

STAT OF THE DAY

The total number of female billionaires fell to 190 from 197 last year, women make up 10% of the world’s 1,810 ten-figure fortunes.